Dealing with Soft Commitments

Dealing with Soft Commitments
Read time 1.9 minutes

One of the worst things about fundraising is getting a soft commitment. How often have you heard, “I’ll invest if you find a lead investor” or “I’ll invest if you can get another $250,000 committed”?

These horrible soft commitments are NOT legally binding and often are an investor's way of dragging you along with actually committing funds, which is what you need to start creating FOMO around the round.

So let’s chat about what often happens when you have soft commitments and how to deal with it to turn the situation to your advantage.

Promoting Soft Commitments

Some founders don’t realize that you can’t promote soft commitments to other investors. Because they aren’t solid, you have two issues: (i) investors know that they aren’t guaranteed, (ii) your only proof is a conversation or email. Investors just can’t rely on soft commitments, so getting one won’t help you raise money from other investors.

The Reality

Most first-time founders don’t realize just how much BS there is behind a soft commitment. In my experience, 99% of them fall through when you don’t reach the condition set on the investment, and 80% fall through even when you do reach the condition.

Often, when you reach the condition and then go collect your money, you’ll hear some excuses like:

• The market has changed, and we are no longer interested.

• We don’t have the money to make this investment anyone.

• We would need better terms to consider moving forward.

• We invested in someone else that is competitive with your business.

• We are already in Due Diligence with a few companies and don’t have the capacity for another deal.

I’ve had clients deal with each of those exact scenarios.

Turning the Tables

Here are the best strategies I’d recommend for dealing with people who give you soft commitments:

1. Codify the agreement - Try to get them to put the agreement in writing. If you do X, they will invest Y. Most won’t do this, but it’s worth trying. If you get this, then it will be more persuasive when talking to other investors.

2. Find a lead - Once you find a lead, if you have some soft commitments, you can truly put pressure on them and create some FOMO. Tell them the round is closing, and they must say yes or no now. If they had any real interest, it would prompt an investment.

3. Collect enough to fill 1.5x the round - If you can collect enough soft commitments to fill 1.5x the amount you want to raise, then you can also use this to create FOMO. Send a message saying that you have an overcommitment of hard and soft commitments, so all soft commitments will need to become hard commitments, or they are out. This pressure will cost you 1/3rd of those soft commitments but can turn that other 2/3rds into enough hard money to fill your round.

TLDR
Soft commitments suck but they are part of fundraising. Knowing how to leverage them is key to long-term fundraising success.

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